Fireman's Fund Ins. Co. v. Great Am. Ins. Co. of N.Y.

Decision Date20 May 2016
Docket NumberNo. 14–1346–cvL.,14–1346–cvL.
Citation822 F.3d 620
PartiesFIREMAN'S FUND INSURANCE COMPANY, One Beacon Insurance Company, National Liability and Fire Insurance Company, QBE Marine & Energy Syndicate 1036, Plaintiffs–Counterclaim–Defendants–Appellants, v. GREAT AMERICAN INSURANCE COMPANY OF NEW YORK, Defendant–Crossclaim–Defendant–Counter–Claimant–Appellee, Max Specialty Insurance Company, Defendant–Crossclaim–Defendant–Counter–Claimant–Appellee, v. Signal International, LLC, Defendant–Crossclaim–Defendant–Cross–Claimant.
CourtU.S. Court of Appeals — Second Circuit

John A.V. Nicoletti (Robert A. Novak, William M. Fennell, on the brief), Nicoletti Hornig & Sweeney, New York, NY, for PlaintiffsAppellants.

George R. Zacharkow (Stephen J. Galati, Christian T. Johnson, on the brief), Mattioni, Ltd., Philadelphia, PA, for DefendantAppellee Great American Insurance Company of New York.

Stephen D. Straus, Traub Lieberman Straus & Shrewsberry LLP, Hawthorne, NY, for DefendantAppellee Max Specialty Insurance Company.

Before: CABRANES, POOLER, and DRONEY, Circuit Judges.

DRONEY, Circuit Judge:

PlaintiffsAppellants are Fireman's Fund Insurance Company, One Beacon Insurance Company, National Liability and Fire Insurance Company, and QBE Marine & Energy Syndicate 1036 (collectively Fireman's Fund), insurance companies that provided marine general liability and marine excess liability policies to DefendantAppellant Signal International, LLC (Signal).1 Fireman's Fund and Signal appealed from a judgment of the United States District Court for the Southern District of New York (Oetken, J. ), granting summary judgment to DefendantsAppellees Great American Insurance Company of New York (Great American) and Max Specialty Insurance Company (MSI).

Fireman's Fund, Great American, and MSI issued insurance policies that provided various coverages for a dry dock in Port Arthur, Texas owned by Signal. After the dry dock sank in 2009, Signal and Fireman's Fund sought contributions from Great American and MSI for the loss of the dry dock and resulting environmental cleanup costs. The district court ruled in adjudicating a number of summary judgment motions that the Great American and MSI policies were void in light of Signal's failure to disclose when it applied for those policies that the dry dock had significantly deteriorated and that repairs recommended by a number of consultants and engineers over several years had not been made.

After submission of this appeal, MSI and Signal reached a settlement and obtained a dismissal of the case between them. Therefore, Signal no longer appeals the grant of summary judgment to MSI. Nonetheless, Fireman's Fund asserts that it may still pursue appeal of the issues relating to the policy issued to Signal by MSI based on our decision in Maryland Cas. Co. v. W.R. Grace & Co. See 218 F.3d 204, 211 (2d Cir.2000) ([T]he contract of settlement an insurer enters into with the insured cannot affect the rights of another insurer who is not a party to it. Instead, whatever obligations or rights to contribution may exist between two or more insurers of the same event flow from equitable principles.”). Fireman's Fund was granted summary judgment below against MSI on a contribution claim based on MSI's policy, and we assume without deciding that Fireman's Fund is correct that it may pursue this appeal of the district court's decision finding the MSI policy void, based on Fireman's Fund's interest in the unappealed summary judgment decision on contribution.

We agree with the district court's orders. We hold that the Great American policy was a marine insurance contract subject to the doctrine of uberrimae fidei and that Signal's nondisclosure violated its duty under that doctrine, permitting Great American to void the policy. We further hold that MSI's policy was governed by Mississippi law; that, under that law, Signal materially misrepresented the dry dock's condition; and that MSI was entitled to void the policy on that basis. Accordingly, we AFFIRM.

I. Factual Background
A. The Operation and Loss of the Dry Dock

Signal is a marine construction firm involved principally in building and repairing ocean-going structures such as offshore drilling rigs, platforms, and barges. In 2003, Signal purchased six facilities—two in Mississippi and four in Texas—for use in its business of repairing, upgrading, and converting offshore drilling rigs.2 One of the Texas facilities was a dockyard in Port Arthur, Texas. In acquiring that facility, Signal assumed an existing lease of a dry dock (“the dry dock”) located along the Sabine–Neches Waterway near the Gulf of Mexico.3 The dry dock was built in 1944 at the direction of the United States Navy to repair Navy ships. In early 2005, Signal accepted an offer from the lessor to purchase the dry dock, which Signal had been using in its operations since it assumed the lease.

Throughout its lease and ownership of the dry dock, Signal received a number of reports on the dry dock's deteriorated condition. These included the following:

The Heger Reports: The dry dock engineering firm Heger Dry Dock, Inc. (“Heger”) of Holliston, Massachusetts, periodically inspected the dry dock between 2002 and 2009. In 2002, Freide Goldman Offshore—the operator of the dry dock before Signal—asked Heger to inspect the dry dock in order to provide an estimate of its fair market value.4 In a December 2002 appraisal, Heger described “the dry dock [as being] ... in fair to good condition, with the exception of the pontoon deck ..., which [was] in poor condition and should be replaced, and section H, which showed markedly more corrosion internally....”5 J.A. 4215. Heger estimated that the dry dock would have “10 years of remaining useful life if the pontoon deck [was] completely repaired,” but the costs of making these “extensive repairs” in the United States rendered the dry dock's value “below zero.”6 J.A. 4215, 4216. In a series of subsequent reports from 2007 through 2009 commissioned by Signal to assist it in prolonging the existing life of the dry dock, Heger found that the dry dock had continued to deteriorate and that long-term repairs had not been made. Instead, Signal had simply patched damaged areas with “doublers.”7 J.A. 688. Heger provided recommendations for extensive repairs that would be required for the dry dock to continue to operate safely. However, Heger repeatedly advised that “the expected life extension for the dock ... [would] only be a few years” and therefore “the cost, time and effort to perform this work [was] not economically justifiable.” J.A. 689. Heger also provided Signal with plans for converting the dry dock to a seven-pontoon configuration (by removing Pontoon H) but warned that “the dry dock structure ... should be satisfactorily restored before using the dock or proceeding with any modifications.” J.A. 4513–14.
The ABS Audits: Auditor ABS Consulting (“ABS”) of Houston, Texas, a maritime risk management firm, was designated by the Port of Port Arthur to review and report on Signal's maintenance and repair programs at the dry dock. In 2003, ABS observed “the rapidly increasing rate of overall deterioration” of the dry dock, which was “largely due to the drydock's age ..., and ... lack of adequate maintenance and/or repair.” J.A. 4166. ABS noted that, although it had notified the dry dock's owners and operators in January 2000 of the “advanced state of ... deterioration,” they had “made no apparent efforts” to implement ABS's recommended repairs. J.A. 4168. Instead, “more than a hundred doubler plates ha[d] been welded over severely wasted/holed ... platings.” J.A. 4167. Six months later, ABS reported that Pontoon H was “leaking severely,” and Pontoons E and G were “leaking significantly” as well. J.A. 4161. ABS concluded that “it appeared that unsafe drydock operations were being conducted” and recommended that “additional drydockings [not be conducted] until substantial hull repairs [were] made to ‘H’ pontoon and the repairs [were] verified.” J.A. 4162 (emphases omitted).
Internal Staff Study: In April 2003, Signal conducted an internal “staff study” to determine whether to purchase the leased dry dock from the Port Commission of Port Arthur. The study found that, “without major renewal costs,” the dry dock's remaining useful life was “only 3 to 5 years.” J.A. 4188. The study concluded that it would cost $21.88 million to extend the life of the dry dock's pontoons “for maybe 10 to 15 years.” J.A. 4186–87. The study ultimately advised against purchasing the dry dock in light of its “relatively short remaining useful life and extreme costs of renewal/life extension.” J.A. 4188.
The DLS Surveys: The marine appraiser, surveyor, and consulting firm Dufour, Laskay & Strouse, Inc. (“DLS”) of Houston, Louisiana, and Florida was hired to inspect and appraise Signal's Texas and Mississippi facilities “for the purpose of asset allocation and financial review” by GE Commercial Finance, Signal's financing company. J.A. 526. Between 2005 and 2007, DLS observed that the dry dock “had significant water in most compartments ... [that] require[d] pumping and trimming every four hours,” which was “indicative of some wastage holes in the bottom.” J.A. 551, 4437; see also J.A. 5314. Each year, DLS noted that [t]he deck plating ... ha[d] significant doubler plates where plating ha[d] either wasted or separated from internal framing” and that “there was ... a 12' long tear in the plating extending along a transverse frame” that “reportedly ... w[ould] be fitted with a proper doubler in the near future.” J.A. 551, 4437, 5314. In 2007, DLS concluded that the dry dock was in “fair to good condition” but recommended that its pontoons be dry-docked and repaired [a]s soon as practical within the succeeding eighteen months ... to render [it] in good stable operating condition and provide a life extension.” J.A. 4437.
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